MICROECONOMICS>LL PRINT COMPANION<
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ISBN: 9781260517651
Author: McConnell
Publisher: MCG
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Chapter 5, Problem 5RQ
To determine
Unfunded liabilities.
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9. True or false? If the statement is false, explain why: LO4
a. An internally held public debt is like a debt of the left hand owed to the right hand.
b. The Federal Reserve and federal government agencies hold more than half the public debt.
c. As a percentage of GDP, the federal debt held by the public was smaller in 2010 than it was in 1990.
d. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced industrial nations.
25) The graph above shows the market for a one-year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This will result in the private-sector borrowing to be crowded out by X dollars. What is the value of X?
O. 50
O. 100
O. 150
O. 200
26). The graph above shows the market for a one year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This results in the private-sector borrowing to be crowded out. At the end, the private sector will end up borrowing X dollars. What is the value of X?
O. 50
O. 100
O. 150
O. 200
O. 250
5. Suppose the interest rate on a taxable corporate bond is 7 percent while a municipal, tax exempt bond has an interest rate of 5 percent, and they are similar in every other way.a. Assuming the income tax rate is 30 percent, calculate the after tax interest rate on the corporate bond. Is it higher or lower than the after tax return on the municipal bond?b. What is the income tax rate that equalizes the after tax return between the corporate bond and the municipal bond.
Chapter 5 Solutions
MICROECONOMICS>LL PRINT COMPANION<
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- This problem gets at the question of whether a government can run a budget deficit forever. For a government to avoid defaulting on its debt, it has to ensure its Debt/GDP ratio doesn’t get too big. Assume that ratio is not too big in the US right now, even though it’s about 100%.a) US nominal GDP has been rising by about 4% in recent years. Assume that continues. How much can US government debt rise each year in percent and keep the Debt/GDP ratio constant? b) If US government debt equaled $23 trillion at the start of this year, how big of a budget deficit could the US government run in dollars this year and still keep its Debt/GDP ratio constant?arrow_forwardSuppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardQ.1.5 Which one of the following statements regarding fiscal policy and the budget is correct?(a) When the government plans to stimulate economic activity, it can increase spending or reduce taxes;(b) Revenue from tax is always greater than government spending in SouthAfrica;(c) Demand management only refers to fiscal policy;(d) A contractionary fiscal policy should be implemented to combatunemployment.arrow_forward
- 1- Can you explain the benefit principle and ability to pay approach with regard to tax equity. Which approach do you think is appropriate regarding tax equity (fairness) ? And why? 2. Can you explain the effects of government borrowing regarding Ricardo’s Equivalence Theorem and give the main arguments against this theorem. Thank you very much.arrow_forward9. The rise or fall of people's incomes, fluctuations in interest rates, the changes in fiscal policy of governments that results in increased or decreased government spending are all elements that come under the category of ...... trend. Select one: O a. D. sociocultural O b. A. regulatory O c. C. demographic O d. B. economicarrow_forward3. a. Suppose that in a year when GDP is rising rapidly you also observe theGovernment budget balance increasing. How can you explain this correlation? b. Now suppose instead that in a year when GDP is rising rapidly you also observethe Government budget balance decreasing. How can you explain this correlation?arrow_forward
- If the government were to try to offset surplus years with deficit years over the business cycle, this would result in O A. a reduction in investment capital. O B. a higher debt-to-GDP ratio. OC. an annually balanced budget. O D. a structurally balanced budget. O E. a cyclically balanced budget.arrow_forwardSuppose the government's present value of current and projected future outlays is 75 percent of GDP and its present value of current and projected future revenues is 50 percent of GDP. What gap does this describe, and what is the size of the gap? This information describes the _______. A. fiscal gap, which is 25 percent of GDP B. generational gap, which is 25 percent of GDP C. fiscal gap, which is 125 percent of GDP D. fiscal gap, which is – 25 percent of GDParrow_forwardNow suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion. What is the new level of gross national debt? If 100 percent of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt? 3. If GDP increases by 6 percent in the same year as the deficit is run, what happens to the gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?arrow_forward
- 1. Why are persistent budget deficits worrisome? - Deficits can lead to private investment spending being crowded out. - Debt places an increased burden on the economy in the future. - The likelihood of default increases. - All of the above.arrow_forward2. Compared to a balanced budget or a budget surplus, what is the effect of a government budget deficit on national saving in the economy? A. National saving is unchanged. OB. National saving decreases. OC. National saving increases. D. National saving could increase or decrease. 3. What is the effect of a budget deficit created by an increase in governmentarrow_forward10. A decrease in Federal government taxes would: O. decrease in consumption and savings O. decrease transfers and government purchases O. increase in consumption and savings O. decrease importsarrow_forward
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